Brewers struggle with cost surge

Brewers struggle with cost surge

3 minutes, 14 seconds Read
By Akinsuroju Olubunmi

Brewers struggle with cost surge

Brewers struggle with cost surge

The brewery industry is grappling with severe cost pressures as the prices of local raw materials like sorghum and wheat soar, undermining their backward integration strategy.


Industry stakeholders report that rising inflation, agricultural insecurity, and macroeconomic challenges will continue to elevate costs. Brewers initially adopted a backward integration strategy to save on import costs amid exchange rate volatility. However, this strategy is faltering, with leading brewers’ local raw materials expenses jumping 113.6% to N188.0 billion in Q1 2024 from N88.0 billion in Q1 2023. Interim reports indicate further increases in Q2 2024 with no relief in sight.


Experts warn that this policy failure may lead to increased raw material imports despite the foreign exchange implications, posing another setback for Nigeria’s industrialization and job creation efforts. Vanguard’s findings also show that under these pressures, Nigeria’s top four breweries resorted to bank loans, accumulating N812.7 billion in credits in Q1 2024, marking a nearly 29% increase quarter-on-quarter.


Financial data from Nigerian Breweries Plc, Guinness Nigeria Plc, International Breweries Plc, and Champion Breweries Plc show that finance costs (interest on borrowing) soared by 191.2% to N125.5 billion in Q1 2024 from N43.1 billion in Q1 2023.


Alhaji Aliko Dangote, Chairman of Dangote Group, expressed concern over the new 30% interest rate following the Central Bank of Nigeria’s Monetary Policy Rate hike, stating it is detrimental to businesses, particularly manufacturers.


Despite product price hikes, the industry struggles with escalating costs and economic hardships, resulting in significant losses in 2023 and Q1 2024. Inflation, declining purchasing power, naira depreciation, fuel price hikes, and higher electricity tariffs have forced breweries to raise product prices to stay afloat, but analysts fear this could further reduce demand.


The industry’s combined loss after tax reached N169.7 billion in Q1 2024, a staggering 1034% increase from N14.9 billion in Q1 2023. Foreign exchange losses in Q1 2024 totaled N272.9 billion, a 1342% rise from N18.9 billion in Q1 2023, driven by naira devaluation effects. Additionally, the industry’s cost of sales surged by 250.9% to N278.5 billion from N79.3 billion in Q1 2023, and net finance costs climbed 616.1% to N191.2 billion from N22.7 billion in Q1 2023.


With Nigeria’s inflation at 33.95% as of May, breweries have raised product prices multiple times. International Breweries Plc increased prices twice this year, effective June 1, 2024. Guinness also announced price hikes due to economic challenges impacting production costs.


Nigerian Breweries Plc approved a second price change in February 2024. These adjustments are responses to market realities, aiming to maintain sales growth and partner profitability.


In reaction to the challenging environment, Nigerian Breweries plans a company-wide reorganization, including temporarily suspending operations in two breweries. The company will explore options to minimize employee impact, including relocation and severance packages, while continuing community support.


Guinness Nigeria Plc reported a N56.4 billion loss after tax and a N37.0 billion FX loss in Q1 2024. Analysts at Cardinalstone Research expect ongoing cost pressures, predicting a decline in gross profit margins due to rising raw material costs and foreign exchange volatility.


Economy and communications expert Clifford Egbomeade attributes the industry’s poor performance to intense competition, economic hardship, increased excise duties, and the forex crisis, all contributing to production cost hikes and price increases. He warns that some breweries may face closure or consolidation, leading to job losses and economic challenges.


David Adonri, Executive Vice Chairman of High Cap Securities Limited, highlighted the worsening situation post-naira float, with many breweries suffering FX losses and negative balance sheets. Inflation and high production costs have eroded consumer purchasing power, impacting profitability and tax contributions.


To avoid shutdowns, breweries are recapitalizing to boost working capital and settle short-term liabilities. International Breweries Plc is running a Rights Issue, while Nigerian Breweries Plc plans to raise capital soon. Despite challenges, breweries remain determined to leverage Nigeria’s market potential, anticipating business recovery as the economy stabilizes.


Brewers Struggle with Cost Surge

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